Biggest beneficiary of improved pricing
Deleveraging to remain strong
* SAIL continues to reap the benefits of higher steel prices as 4QFY21 EBITDA grew 21% QoQ, despite a wage revision impact. In the absence of significant capex, net debt declined further to INR366b (v/s INR538b in Mar’20).
* With steel prices at a record high, SAIL is poised to post its best ever EBITDA/t of ~INR20,000 in 1QFY22. We upgrade our FY22E/FY23E EBITDA estimate by 71%/33% to factor in higher steel prices, and estimate a further INR102b (INR25/share) fall in net debt to INR265b (1x EBITDA) in FY22E.
* We expect dividend payout to be strong at INR10/share in FY22E (7.5% yield), based on an expected 25% payout ratio. Reiterate Buy.
EBITDA up 21% QoQ despite a wage revision hit
* Sales/EBITDA/adjusted PAT rose 17%/21%/39% QoQ in 4QFY21 to INR232.9b/61.5b/35.7b and was 1%/9%/11% below our estimate.
* Blended realization grew only INR5718/t QoQ (v/s 8-10k/t for peers) to INR53,531/t (est. INR55,273/t), due to weaker mix and sales to railways (~10% of volumes) made at lower provisional prices.
* Employee cost was higher at INR40.7b (est. INR36.3b) v/s INR23.4b in 3Q due to an INR11.6b provision for wage revision in FY21. As a result, EBITDA/t stood at INR14,145/t (+16% QoQ) on a reported basis and at INR16,802/t (+37% QoQ) adjusted for a wage revision provision.
* Sales volume stood at 4.35mt, up 5% QoQ/16% YoY.
* Finance cost fell 19% QoQ to INR5.4b due to debt repayments.
* Consolidated revenue/EBITDA stood at INR691.1b/INR127.4b in FY21, up 12%/123% YoY on higher EBITDA/t of INR8,526/t (+112% YoY). Adjusted PAT stood at INR54.5b v/s a loss of INR1.9b in FY20.
* Higher FCF leads to net-debt reduction: Led by strongOCF at INR234b (higher EBITDA and working capital release of INR100.6b) and lower capex at INR35.3b (-20% YoY), FCF rose to INR199b (v/s INR49.9b in FY20). This helped lower net debt by INR167b YoY (INR76.8b QoQ) to INR366b in Mar’21. Net debt/EBITDA ratio declined to 2.9x, the lowest since FY12.
Conference call takeaways – Profitability to improve on higher NSR
* Volume guidance:Despite a production loss in Apr-May’21, SAIL has guided at steel/iron ore sales of 18.3mt/13.5mt in FY22 (v/s 14.9mt/3.2mt in FY21). We have factored in sales of 16.6mt in FY22.
* Pricing remains strong in Jun’21: Steel realization remainsstrong in Jun’21, with flats/longs NSR in Jun’21 being higher by ~INR10,000/INR5,500 per tonne over Mar’21 at INR63,500/INR50,500 per tonne.
Valuation and view
* Despite factoring in a conservative realization (~15% discount to spot) and higher coking coal prices (USD165/t CNF India) in FY22E, we estimate SAIL’s EBITDA to grow by over 100% YoY to INR270b.
* We estimate a further INR102b (INR25/share) fall in net debt to INR265b (1x of EBITDA) in FY22E on the back of higher operating cash flows.
* We value the stock at 5x FY23E EV/EBITDA at INR185/share, implying a target P/B of 1.2x (v/s its historical average of 0.7x). Reiterate Buy.
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